Bitcoin Bits: February 5 2016

It wasn’t a great week for bitcoin reporting – too many articles on bitcoin + terrorism, blockchains + banks that persistently perpetuate misconceptions about the nature and mechanics of the virtual currency. But I did manage to find some good ones:

As I thought: banks and the blockchain aren’t a match made in heaven after all. Mike Gault comes at it with a different perspective, though, all the more interesting given that he’s been working in this space since the beginning: it’s not so much the impracticality of the blockchain that stands in the way of bank adoption. It’s more that the banks aren’t at this point capable of incorporating what the blockchain has to offer.

“For one, most banks have massive infrastructure debt in financial processing systems. These systems could be 15, 20 years old. But they power transactions between the world’s major businesses and governments; disrupting them, even for a short time, could be disastrous. Trying to overhaul them altogether is a tall order, and comes with huge risk. I doubt that many people within banks want to take responsibility for that, especially when it’s entirely outside the existing business model.

Another problem is with priorities. Banks already have a huge technology headache: keeping pace with the web of global regulations. This is an immensely challenging, high stakes and constantly shifting landscape; it will always be first priority for banks and their technology departments. When so much energy and budget go to keeping regulators off your back, it’s hard to justify diverting resources to a completely unrelated issue.

But the main problem is that institutionally, banks are not wired to drive this kind of innovation. Quite simply: bureaucracy.”

With these intrinsic obstacles, Gault argues that the banks aren’t going to want to “go the extra mile” and actually use the “experiments” they’re participating in. Too complicated. Too risky. Too innovative for their culture.

Off all the reports this week on the European Union’s announcement of its plan to strengthen the fight against terrorism financing, this was one of the most objective.

It didn’t imply that bitcoin was used for terrorism:

“While the plan doesn’t offer evidence of virtual currencies being used to finance terrorism, the EC is alive to the possibility and feels it is better to contemplate regulation as part of the ongoing effort to stop terror attacks.”

And it didn’t imply that the EC was singling out the virtual currency for special attention:

“Bitcoinistas needn’t feel singled out by the EC: the Action Plan also calls for a re-think of how to and when identify users of pre-loaded credit cards, without reducing their utility for the many people (many of them poor) who find them a useful financial instrument because they operate as credit cards but don’t require holders to be credit-worthy. There’s also a call for a central register of bank accounts and account holders to be established in all European Union member sates.”

Nor does it claim that bitcoin is anonymous, instead referring to advice on how to increase its “privacy” (since it’s not a default state).

It also points out the futility of the (understandable and necessary) exercise:

“Throw in the fact that plenty of virtual currency exchanges operate beyond the EU’s regulatory reach and that such operators will find ways to make it possible to cash in cryptocurrencies inside Europe. Even if crimping cryptocurrencies successfully denies terrorists access to funds, the Action Plan predicts exactly what they’ll do next: find a less-risky way to get their hands on cash.”

A refreshingly optimistic piece that touches on the recent bitcoin squabbles, but swiftly moves into hopeful territory.

“Once you’ve seen the power of a peer-to-peer digital currency and permissionless payment network, it’s hard to unsee them. Bitcoin has opened our eyes and created new expectations for the ways we store and transfer value of all kinds.

While we believe in bitcoin specifically, we also see it as just one piece of a growing ecosystem of distributed systems, shared ledgers, and cryptographic technology which will have a profound impact on how we interact, transact, and communicate with each other.”

Nothing new, but it’s nice to see some positivity and excitement over the potential.

To end where we began (obviously the week’s main theme), here you have one of the best explanations I’ve seen in a while of how the blockchain isn’t going to replace traditional banking.

“For any trusted third party carrying out payments, trading, or recordkeeping, the blockchain is an extremely costly and inefficient technology to utilize. A non-bitcoin blockchain combines the worst of both worlds: the cumbersome structure of the blockchain with the cost and security risk of trusted third parties. It is no wonder that seven years after its invention, blockchain technology has not yet managed to break through in a successful, ready-for-market commercial application other than the one for which it was specifically designed: bitcoin.”

Saifedean talks about how the blockchain’s main advantage is that it removes the need for trust. If you have trust, there are other, less expensive ways to securely exchange information. The banks’ scramble for blockchain technologies belies a lack of understanding of what bitcoin and the blockchain are really about.

“There are many simple technologies banks need to optimize and to improve to enhance their products. Instead, they are seduced by the siren song of futuristic buzzwords and searching for a problem to solve with a blockchain. But they won’t find anything.”

My favourite part of the article comes at the very beginning:

“In 1855, Karl Benz combined his profession of manufacturing internal combustion engines with his hobby of designing carriages to produce the first autonomously powered mobile carriage —the automobile. Benz introduced an engine as a solution to a specific engineering problem: to make a carriage move quickly without a horse. The engine supplanted the horse; it did not make horses faster.”